PMB Australia Limited v MMI General Insurance Ltd
[2001] QSC 288
•10 August 2001
SUPREME COURT OF QUEENSLAND
CITATION: PMB Australia Limited v MMI General Insurance Ltd & Ors [2001] QSC 288 PARTIES: PMB AUSTRALIA LIMITED ACN 057 251 091
(plaintiff)
v
MMI GENERAL INSURANCE LIMITED
ACN 000 122 850
(first defendant)
and
SUN ALLIANCE & ROYAL INSURANCE AUSTRALIA LIMITED ACN 005 297 807
(second defendant)
and
CIC INSURANCE LIMITED ACN 004 078 880
(in provisional liquidation)
(third defendant)
and
ZURICH AUSTRALIAN INSURANCE LIMITED
ACN 000 296 640
(fourth defendant)
and
SUNCORP GENRAL INSURANCE LIMITED
ACN 075 695 966
(fifth defendant)
and
GIO GENERAL LIMITED ACN 002 861 583
(sixth defendant)
and
QBE INSURANCE LIMITED ACN 000 157 899
(seventh defendant)
and
FAI GENERAL INSURANCE COMPANY LIMITED
ACN 000 327 855 (in provisional liquidation)
(eighth defendant)FILE NO: 5235 of 1998 DIVISION: Trial Division DELIVERED ON: 10 August 2001 DELIVERED AT: Brisbane HEARING DATE: 9 May 2001 JUDGE: Mullins J ORDER: 1. The plaintiff must on or before 24 August 2001 deliver to the defendants and the Associate to Her Honour Justice Mullins written submissions on the issues of interest carrying costs, interest under s 57 of the Insurance Contracts Act 1984 (Cth), costs of the proceeding, the form of orders and any other outstanding matters.
2. The defendants must on or before 31 August 2001 deliver to the plaintiff and the Associate to Her Honour Justice Mullins written submissions in response to the plaintiff’s submissions under the preceding order.
3. The plaintiff must on or before 7 September 2001 deliver to the defendants and the Associate to Her Honour Justice Mullins any written submissions in response to the defendants’ submissions under the preceding order.
4. Either party may on or before 11 September 2001 notify the other party and the Associate to Her Honour Justice Mullins if an oral hearing is required in relation to the matters the subject of the written submissions, but in the absence of any such notification the outstanding matters will be determined by reference to the written submissions of the parties.
CATCHWORDS: INSURANCE – BUSINESS INTERRUPTION – PROXIMATE CAUSES – quantification of loss – evidentiary burden – assessment of loss by court where quantification difficult
INSURANCE – BUSINESS INTERRUPTION – characterisation of expenses claimed – whether incurred as a consequence of interruption to business as a result of insured cause – whether costs of mitigating loss recoverable
Insurance Contracts Act 1984 (Cth) s 57
AMP Fire & General Insurance Co Ltd v Collie (1991) 6 ANZ Insurance Cases 61-081
Australian Competition and Consumer Commission v Golden Sphere International Inc (1998) 83 FCR 424
Callaghan v William C Lynch Pty Ltd [1962] NSWR 871
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167
Fink v Fink (1946) 74 CLR 127
JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd ("Miss Jay Jay") [1987] 1 Lloyd's Rep 32
Kosev v GIO General Ltd (unreported, ACT Sup Ct, 8 October 1997)
Lake v Hartford Fire Insurance Co Ltd [1966] WAR 161
ReMining Technologies Australia Pty Ltd [1999] 1 QdR 60
Purkess v Crittenden (1965) 114 CLR 164
Rennie v Commonwealth of Australia (1995) 61 FCR 351
Watts v Rake (1960) 108 CLR 158
Wheeler v Riverside Coal Transport Co Pty Ltd [1964] QdR 113COUNSEL: C G Gee QC and M K Stunden for the plaintiff
S C Williams QC and J P Kimmins for the defendantsSOLICITORS: McCullough Robertson Lawyers for the plaintiff
Gadens Lawyers for the defendants
MULLINS J: I published reasons for judgment after the trial in this action on 26 September 2000 ("the reasons"). The action was adjourned for further submissions, in the light of the findings which I had made. Eventually the plaintiff made an application to reopen the evidence which was heard on 21 March 2001. That application was refused and directions were given in relation to the filing of submissions by each party dealing with the outstanding issues identified in the reasons. A hearing in relation to those issues took place on 9 May 2001.
The outstanding issues are found in paras [230], [252], [255], [263], ]264], [268], [271], [275], [277], [278], [281] and [288] of the reasons.
Loss of gross profit due to reduction in turnover
The calculation required under Item 1(a) Basis of Settlement is set out in para [197] of the reasons. The issue left to be determined which was referred to in para [230] of the reasons is the need for any apportionment or adjustment of the reduction in turnover to accommodate the finding that the reduction in turnover was caused by both the salmonella outbreak and the need to address the perceived risk of salmonella contamination in the future. As stated in para [230] of the reasons, there was no attempt in evidence or submissions during the trial to apportion the responsibility of each cause for the reduction in turnover, because of the approach taken by each party in conducting its case.
The plaintiff's submission is that, given that the plaintiff has established that the salmonella outbreak was a proximate cause of interruption to 31 March 1997, the plaintiff has established a prima facie entitlement to indemnity based on the loss proven to have been suffered to that date which means that, in respect of Item 1(a) Basis of Settlement, the plaintiff is prima facie entitled to its losses based on the reduction in turnover found at para [225] of the reasons without any further adjustment.
The plaintiff submits that it has discharged both its legal and its evidentiary burden to the stage of establishing this prima facie entitlement and that an evidentiary burden shifts to the defendants to show that it is possible to carry out further adjustment to the reduction in turnover to discriminate between any identifiable respective responsibility for each cause of the interruption as found.
The defendants submit that the plaintiff's claim based on reduction in turnover should be dismissed as the plaintiff has failed to prove what reduction in turnover has directly resulted from the interruption of or interference with the plaintiff's business which was proximately caused by the salmonella outbreak. In particular the defendants submit that the plaintiff led no evidence as to what the standard turnover would have been had the plaintiff's business not been interrupted or interfered with only by causes which were proximately caused by the salmonella outbreak (as distinct from the new awareness of the risk of salmonella contamination) nor did the plaintiff lead evidence as to what effect on turnover would have resulted from the interruption or interference with the plaintiff's business caused by the Kraft and QHD requirements.
On this aspect of which party bears the evidentiary burden in relation to any apportioning or adjusting of the responsibility of each proximate cause for the reduction in turnover, the defendants submit that at no time did any evidentiary burden shift to the defendants.
The plaintiff supports its argument by reference to statements made in Watts v Rake (1960) 108 CLR 158 in respect of the burden of proof upon a defendant which sets up a matter in mitigation of damages when a plaintiff sues in tort for unliquidated damages. In Watts the plaintiff claimed damages for injuries which he suffered in a motor vehicle collision caused by the negligence of the defendant. The defendant claimed that part of the plaintiff's condition was traceable to causes other than the accident and that, had there been no accident, the plaintiff would eventually, but prematurely, have been incapacitated. On these issues Dixon CJ stated at 160:
"If the disabilities of the plaintiff can be disentangled and one or more traced to causes in which the injuries he sustained through the accident play no part, it is the defendant who should be required to do the disentangling and to exclude the operation of the accident as a contributory cause. If it be the case that at some future date the plaintiff would in any event have reached his present pitiable state, the defendant should be called upon to prove that satisfactorily and moreover to show the period at the close of which it would have occurred."
The issue of burden of proof in relation to damages for personal injuries caused by negligence was considered again by the High Court in Purkess v Crittenden (1965) 114 CLR 164. Windeyer J stated at 170-171:
"In Watts v. Rake (1960) 108 CLR 158 there is also a reference by Dixon C.J. to another situation, that which arises when it is said that a plaintiff's disabilities should be regarded as the separate consequences of concurrent and independent causes only one of which is the conduct of the defendant. Such cases can no doubt exist. But again a defendant is not relieved of responsibility for the consequences of his conduct because the plaintiff would not have suffered as he did unless other contributory factors had existed. The ordinary conclusion when a man suffers a hurt is that all the consequences that follow it are attributable to the events that immediately caused it. If it be suggested that this is not so, that some of the apparent consequences are not causally related to it, then some material is required to support that suggestion. It is in this sense and at this stage that a burden of adducing evidence is upon the defendant." (footnote inserted)
After making reference to the passage from the judgment of Dixon CJ in Watts which is set out above, Windeyer J stated further at 171:
"The plaintiff in his own case need do no more than rely upon the conclusion to be drawn from the basic facts that before the accident he was not disabled: that after it he was disabled in a way that could be a consequence of the hurt he sustained. Whether one calls such a conclusion an inference, a presumption of fact or a presumptio hominis matters not. It is an inference which any tribunal of fact would ordinarily draw until the defendant had, by evidence elicited in cross-examination or led, provided some material to overcome it – either by proving the contrary or throwing the matter into doubt."
The plaintiff points to subsequent authorities where reliance was placed on the approach in Watts or Purkess. In Rennie v Commonwealth of Australia (1995) 61 FCR 351, 367-368 Kiefel J referred to Watts as requiring proof by a defendant of an allegation that a plaintiff had failed to mitigate loss. The plaintiff also relies on the discussion of the distinction between the legal burden and evidential burden found in Australian Competition and Consumer Commission v Golden Sphere International Inc (1998) 83 FCR 424, 449-451 which makes reference to the discussion on the shifting of the evidential burden then found in JD Heydon Cross on Evidence (5th ed, 1996) para 7015 and which is now found in JD Heydon, Cross on Evidence (Aust ed) at paras 7200-7220.
The plaintiff submits that Purkess was relied on by Handley JA in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389, 421-422. The appellant in that case was attempting to establish the amount of its set-off under s54 of the Insurance Contracts Act 1984 (Cth). That was treated by Handley JA as if the appellant's position was analogous to the position of a plaintiff seeking damages. The appellant had established a prima facie case that its damages were equal to the amount of the claim and the insured failed to adduce any evidence in answer to that prima facie case. Handley JA stated at 422:
"Both in principle, and on the authority of Purkess v Crittenden, it cannot be enough for the insured 'merely to suggest' that something would have happened to reduce the appellant's damages. The matters relied upon should have been the subject of evidence which, if accepted, 'would establish with some reasonable degree of precision' what would have happened."
It follows that the application of the principle found in Watts and Purkess is not limited to claims for damages for negligence in personal injury actions.
The difficulty I have with the plaintiff's reliance on the principle in Watts and Purkess is that it proceeds from the proposition that the plaintiff has established a prima facie entitlement to indemnity in respect of Item 1(a) Basis of Settlement and that in the absence of any further evidence on the apportionment of the losses based on the reduction in turnover found at para [225] of the reasons, the plaintiff is prima facie entitled to the amount of $336,579 (calculated by applying the agreed rate of gross profit of 14.47% to the figure calculated for reduction of turnover in the indemnity period set out in para [225] of the reasons, being the sum of $2,326,049).
It is wrong to characterise the sum of $336,579 as the loss to which the plaintiff has prima facie established an entitlement to recover pursuant to Item 1(a) Basis of Settlement. The calculation of the reduction in turnover in the indemnity period which I undertook in the reasons which resulted in the figure of $2,326,049 was expressly done on the basis referred to in para [215] of the reasons that it was "subject to my consideration of whether an adjustment has to be made for the effect on standard turnover of the interruption caused to the plaintiff's business by the need to address the risk of salmonella contamination in the future". In paras [226] to [229] of the reasons, I dealt with the determination of this question and concluded that the answer to the question was found in the wording of the policy. I made reference in para [228] of the reasons to the definition of standard turnover expressly providing for adjustments to be made for "other circumstances" affecting the business, so that the standard turnover represents the results which but for the Damage would have been obtained during the period after the Damage and to the express reference in Item 1(a) Basis of Settlement to the need to calculate the amount by which the turnover during the indemnity period shall in consequence of the Damage fall short of the standard turnover. After making reference to the fact that no case was advanced by either party on the basis that the salmonella outbreak was one of two causes of the reduction in turnover during the indemnity period, I left open in para [230] of the reasons whether there should be further evidence or submissions on apportioning the responsibility of each cause for the reduction in turnover. As mentioned above, the course followed was to receive further submissions.
Any evidentiary burden which rested on the defendants to raise the issue of whether there was another cause (other than the salmonella outbreak) for the reduction in turnover has been satisfied. The issue which arises at this stage is the extent of the loss of gross profit that the plaintiff can prove which is in consequence of the interruption to the plaintiff's business in consequence of the salmonella outbreak.
The onus is on the plaintiff to prove the amount of the loss which is recoverable under Item 1(a) Basis of Settlement: Lake v Hartford Fire Insurance Co Ltd [1966] WAR 161, 168; Kosev v GIO General Ltd (unreported, ACT Sup Ct, 8 October 1997).
As I stated in para [226] of the reasons, the calculation of the reduction in turnover in the indemnity period of $2,326,049 proceeded on the assumption that the reduction in turnover is totally attributable to the salmonella outbreak. That followed as the calculation was based on that put forward at the trial by the plaintiff and the plaintiff treated the need to address the new awareness of the risk of salmonella contamination in the future as part of the consequence of the salmonella outbreak and not as a separate cause of interruption to the plaintiff's business.
For the plaintiff to prove that the reduction in turnover of $2,326,049 should be used in calculating loss of gross profit, it must, in effect, show that the need to address the new awareness of the risk of salmonella contamination in the future had no impact on actual turnover in the indemnity period above the impact of the salmonella outbreak or, alternatively, that this reduction in turnover was totally attributable to the salmonella outbreak.
The plaintiff did not make any submissions in connection with the hearing on 9 May 2001 by reference to the evidence in order to support either of these propositions.
Instead, the plaintiff took the course of submitting that the defendant had the evidentiary burden of showing that it was possible to carry out further adjustment to the reduction in turnover calculation to discriminate between any identifiable respective responsibility for each cause of the interruption, as found. I reject that submission, because it wrongly proceeds on the assumption that the plaintiff has established a prima facie entitlement to indemnity of loss of gross profit based on the reduction of turnover of $2,326,049 and overlooks the onus which the plaintiff bears in proving the amount of the loss of gross profit in accordance with the terms of the policy.
In addition to making this submission on the defendant's evidentiary burden, the plaintiff submits that the turnover loss is just as indivisible as the sinking of the cruiser in JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd ("Miss Jay Jay") [1987] 1 Lloyd's Rep 32.
At a conceptual level, I do not accept that the damage to the hull of a yacht which required repairs in a fixed and indivisible amount is of the same nature as loss of gross profit calculated by reference to a reduction in turnover. Even though the damage to the hull in Miss Jay Jay was found to be caused by two proximate causes, one of which was within the terms of the relevant policy, the consequence was that there was only one loss and the total repair bill for the hull had to be paid by the insurer. In contrast, the reduction in turnover is not an indivisible sum. Different parts of it were contributed to by the various aspects of the interference with the plaintiff's business that followed the salmonella outbreak and also followed the new awareness of the risk of salmonella contamination.
I therefore raised the possibility in para [227] of the reasons that either the specific aspects of the interruption of the plaintiff's business caused by the salmonella outbreak could be identified or the respective responsibility of each cause for the interruption of the plaintiff's business may be able to be identified.
In the light of the findings I made in the reasons, and particularly paras [187] and [188] of the reasons about the QHD recommendations and the Kraft requirements arising from the new awareness of the risk of salmonella contamination which should not be treated simply as a response to the salmonella outbreak and the emphasis placed by the plaintiff's witnesses on the interruption caused by the need to comply with the QHD recommendations and the Kraft requirements, I am not satisfied that the reduction in turnover of $2,326,049 can be wholly attributed to the salmonella outbreak or, in other words, that the need to address the new awareness of the risk of salmonella contamination had no impact on the actual turnover in the indemnity period above the impact of the salmonella outbreak.
The issue arose whether the reduction in turnover could or should be split equally between the two proximate causes of the interference with the plaintiff's business. The defendants submit that as the claim is not a damages claim, no arbitrary apportionment can be made. The principle that applies in an action for damages is that if the court finds damage has occurred, it must do its best to quantify the loss, even if a degree of speculation and guess work is involved: Fink v Fink (1946) 74 CLR 127, 143; Wheeler v Riverside Coal Transport Co Pty Ltd [1964] QdR 113, 124; Callaghan v William C Lynch Pty Ltd [1962] NSWR 871, 877; Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167, 183. In AMP Fire & General Insurance Co Ltd v Collie (1991) 6 ANZ Insurance Cases 61-081 the loss assessor asserted in respect of a claim under an insurance policy that the loss was unquantifiable, because the insured failed to provide sufficient information. It was held, relying on authorities that were each concerned with a court's assessing awards of damages, that the loss assessor must take the same approach as a court which was described at 77,285 as:
"But if the party has suffered a real loss, the court must do its best to place a value on that loss, despite the paucity of the evidence on that point."
The finding in respect of that obligation on a loss assessor could be applied to the role of the court in determining the loss which is claimable by an insured pursuant to an insurance policy. There is no logical reason why the approach of the court in assessing damages which are difficult to quantify should not be applied when the court has to determine the loss claimable under an insurance policy where the court is satisfied that loss has been suffered, but the loss is difficult to quantify.
The plaintiff does not seek an arbitrary apportionment of the reduction in turnover. The plaintiff's submission against apportioning the reduction in turnover equally to reflect the two proximate causes is based on its argument that the plaintiff has already established a prima facie entitlement to loss of gross profit based on the reduction of turnover of $2,326,049 which I have rejected.
The defendant's description of the process as making an arbitrary apportionment does not accord with the method of the court's doing its best by reference to existing evidence to quantify a loss which the court is satisfied was suffered, where the evidence otherwise precludes precise quantification.
Having regard to the findings which I made in paras [186] to [192] of the reasons and the evidence which supports those findings, the interruption to the plaintiff's business as a result of the need to address the new awareness of the risk of salmonella contamination was much more significant than the interruption caused by the salmonella outbreak, but that interruption to the plaintiff’s business caused by the salmonella outbreak did result in a reduction of turnover within the meaning of Item 1(a) Basis of Settlement. Although it is not a matter of precision, I consider that apportioning the reduction in turnover on the basis that 25% was due to the interruption of the plaintiff's business as a result of the salmonella outbreak broadly reflects the impact which the interruption of the business caused by the salmonella outbreak had on the reduction in turnover.
The reduction in turnover attributable to the salmonella outbreak is therefore $581,512. Applying the rate of gross profit of 14.47% makes the loss of gross profit $84,145.
Yield loss
In para [248] of the reasons, I concluded that of all those reasons advanced by the plaintiff for yield loss, the only one that was directly related to the salmonella outbreak was greatly increased sampling. The issue which remains outstanding and which is identified in para [252] of the reasons is what is the percentage of yield loss which can be traced to the increased sampling directly related to the salmonella outbreak as identified in para [248] of the reasons.
The parties have agreed on the calculation of yield loss (without any reduction for that part of the loss caused by the new awareness of the risk of salmonella contamination) to 31 March 1997 as $2,647,000. The plaintiff seeks recovery of this full amount and has not attempted to identify that percentage of yield loss which could be traced to the increased sampling referred to in para [248] of the reasons.
The findings which I made at paras [247] to [251] of the reasons disposed of the plaintiff's claim for the full amount of $2,647,000 for yield loss. I also found at para [255] of the reasons that I was not satisfied in respect of the total claim for yield loss that it was "in consequence of the Damage". It follows that the total claim of $2,647,000 for yield loss is not recoverable under Item 4 Basis of Settlement.
The plaintiff also submits that there is an evidentiary burden on the defendants to establish how much of the known and established loss falls outside the yield losses which it submits are payable in principle under Item 4 Basis of Settlement. This argument fails for the same reason that it fails in relation to the loss of gross profit claim, as it proceeds on an assumption that the plaintiff has otherwise established a prima facie entitlement to the yield loss in the full amount of $2,647,000 which is not the case.
The plaintiff also relies on the decision in ReMining Technologies Australia Pty Ltd [1999] 1 QdR 60 for the proposition that an insured should be reimbursed for costs of mitigating loss pursuant to an implied term of the contract of insurance. The plaintiff submits that the yield loss was incurred in mitigating the reduction in turnover. The plaintiff has not pleaded a case based on an implied term in the policy. When the plaintiff sought to rely on this authority in the course of submissions at the conclusion of the evidence, the defendants opposed the argument being entertained, because it did not relate to the plaintiff's case as pleaded. The plaintiff has not sought to amend its statement of claim. It is therefore strictly not necessary to deal with this argument.
In any case, I accept the submission of the defendants that Re Mining Technologies Australia Pty Ltd does not support the implication of such term in this policy. The policy under consideration in Re Mining Technologies Australia Pty Ltd was a property insurance policy issued by the appellant covering the respondent’s mining equipment. Equipment worth $1.82m was trapped in a tunnel when the roof of the tunnel collapsed. The respondent spent $725,000 in recovering the equipment from the tunnel and claimed that as loss to the equipment under the policy. At first instance it was held that if the peril insured against was sufficiently imminent or had eventuated, it would be unjust (in the absence of a term to the contrary) if an insured expended money to avert or reduce the risk of the insurer becoming liable without an obligation on the part of the insurer to pay for that expenditure. By majority the Court of Appeal dismissed the appeal. Each member of the majority affirmed the judgment for different reasons. Davies JA implied a term to complement an existing exclusion clause which provided that the policy did not cover loss to the property which could have been avoided by the exercise of reasonable care on the part of the insured, so that the implied term allowed the recovery of the expenditure by the insured in exercising reasonable care which avoided that loss. McPherson JA did not find it necessary to determine whether any term should be implied and concluded that the respondent was entitled to recover pursuant to the partial loss provision of the relevant policy on the basis that the process of retrieving the equipment was one of “repair” within the meaning of that provision.
The only judgment in Re Mining Technologies Australia Pty Ltd from which the plaintiff can draw comfort is that of Davies JA, but it is distinguishable on the facts of the plaintiff’s claim. The reasoning of that judgment related to a property damage policy and is not necessarily applicable to a business interruption policy. Davies JA found the implied term by relying on an existing term of the property damage policy which is not found in this business interruption policy. The expense claimed by the respondent in Re Mining Technologies Australia Pty Ltd was incurred when the loss to the equipment was in the process of actually being inflicted. This can be contrasted with the process and plant changes implemented by the plaintiff which were to avoid risk of salmonella contamination in the future, rather than an existing event covered by the policy. The construction given to the extension clause of the policy in para [183] of the reasons also leaves no room for the implication of a term that the plaintiff be allowed to recover expenses in preventing a fresh outbreak of salmonella contamination.
Direct costs
The first issue arising in respect of the balance of the claim for direct costs is the balance 50% of KPMG's fees of $55,270 which is referred to in para [263] of the reasons.
It is only the balance 50% of these fees which is in issue as Mr Wheeley had allowed 50% of KPMG's fees when assessing the plaintiff's claim. I indicated that subject to the question of the extent to which the balance 50% of the fees could be attributed to the disruption caused by the need to address the risk of salmonella contamination in the future, these fees could be characterised as being expended for maintaining the plaintiff's normal business operations, as required under Item 4 Basis of Settlement.
The further submissions made by the parties in relation to this aspect refer to the evidence which was adduced at the trial in relation to these fees. See para 157(c) of Mr Wheeley's statement (Exhibit 15). Mr Wheeley described the total amount invoiced by KPMG of $110,540 as relating "to the preparation of reports to the Commonwealth Bank following the contamination of an application for funding for the 1997 season and other matters for PCA. The Bank was concerned about PCA's security position. At a time following the contamination, Kraft sued PCA for many millions of dollars, in relation to the peanut butter recall. PCA's product liability insurer would not indemnify PCA. PCA joined its insurer in the action".
Mr Wheeley attributes the engagement of KPMG to prepare the funding application to the departure of PCA's company secretary who had prepared previous applications for funding. Mr Wheeley allowed 50% of the KPMG costs, as their services were required as a result of concern which the bank had relating to PCA's liability to Kraft. There was no suggestion in the defendants' evidence that the reason for reducing the allowance of these fees to 50% of the amount was because the fees were attributable to any need to address the risk of salmonella contamination in the future. The reduction of 50% by Mr Wheeley appears to be arbitrary and is merely supported by the defendants' submissions as being "reasonable".
In view of the conclusions which I have already reached about this item and the purpose for which the fees were incurred as set out in Mr Wheeley's evidence, I conclude that the balance 50% of these fees can be characterised as being expended for maintaining the plaintiff's normal business operations and not attributable to the disruption caused by the need to address the risk of salmonella contamination in the future. I therefore allow the balance 50% of KPMG's fees of $55,270.
In relation to the balance of the claim for direct costs of $263,457, I indicated in para [264] of the reasons that I could determine this part of the claim on the basis of the description of each of the expenses as set out in appendix 14 to Mr Rowley's statement, but invited the parties to make further submissions.
The plaintiff's recalculation of this claim on the basis that the indemnity period ended on 31 March 1997 is $208,251. That calculation, though not the liability, has been accepted by the defendants. The parties are agreed on the components of the sum of $208,251 being:
Cleaning VA/BP $61,264 Fees and charges 11,921 Freight 5,548 Laboratory and testing costs 96,680 Health and safety protective clothing 17,307 Accommodation, travel, etc. 15,531 $208,251
The amount of $61,264 cleaning costs comprises:
Allcorp Services $1,453
Kingaroy General Cleaning 14,740
SB Paper & Packaging 56
TR & TA Witcher 45,015
$61,264
The defendants concede that the sum of $1,453 is recoverable, as it arose from a subsequent positive test. In December 1996 TR&TA Witcher entered into a contract to clean down the plant. This appears to have been a contract for cleaning that was required as part of the routine to avoid the risk of salmonella contamination and is therefore not recoverable.
Kingaroy General Cleaning had a contract to clean floors in the plant between September 1996 and February 1997. There are no specific comments in the evidence about this floor cleaning contract. Having regard to the positive test for salmonella mbandaka which was recorded in a swab from what was vacuumed from the floor in the blanching plant on 20 September 1996 and the requirements for cleaning identified by Mr Miller in response to the salmonella outbreak, it is reasonable to apportion part of this cleaning to the salmonella outbreak. The defendants submit that if an arbitrary division is to be made of the sum of $14,740, then a split of 50/50 would be reasonable. I accept that and will therefore allow $7,370 in respect of Kingaroy General Cleaning expenses.
It is difficult to conclude that the sum of $56 spent in October 1996 on purchasing 10 bins could be attributable to the salmonella outbreak. The total amount which I have allowed in respect of cleaning VA/BP is $8,823.
The fees and charges of $11,921 comprise:
KPMG - Melbourne $1,545
Dr Peter Wood 8,236
QUT 2,140
$11,921
The defendants concede that the plaintiff should recover the sum of $1,545 paid to KPMG Melbourne to audit the Hyland cold store.
The payment to Dr Wood covers the period August 1996 to March 1997. On 6 July 1996 Dr Wood had been appointed a technical consultant to the plaintiff on microbial issues for a further 12 months. The letter of appointment lists out five areas in which Dr Wood's assistance was sought. From Dr Wood's own description of the work undertaken by him in this period, most of that work was directly related to the salmonella outbreak. In those circumstances, I will allow the amount of $8,236 claimed for Dr Wood's fees.
The sum of $2,140 was paid to QUT for further tests in November 1996 that were authorised by Dr Wood. In November 1996 Dr Wood procured QUT to undertake tests to show that results of testing of roasted product reported by Symbio-Alliance Laboratories were false positives and did not indicate the presence of salmonella. The need to undertake this testing was directly as a result of the plaintiff's having to ensure that the salmonella contamination had in fact been overcome. The fees of $2,140 paid to QUT are therefore recoverable, making the total claim of $11,921 for fees and charges recoverable.
The amount for freight of $5,548 comprises:
Flemings $170
Kingaroy Freight 196
Kumbia Livestock 740
Q Link 26
Security Express 4,416
$5,548
The defendants concede that the respective sums of $170, $740 and $26 are involved with Kraft returns and therefore recoverable. The sum of $196 is for delivery charges for purchase of "Protector Safety". That relates to equipment to meet changes in hygiene requirements as a result of the new awareness of the risk of salmonella contamination and is therefore not recoverable.
The payments to Security Express are for sending samples by courier for testing (apart from the month of July 1996 which has been included in the costs conceded by the defendants previously). The urgency in testing was during the period when the plaintiff was subject to the QHD testing and clearance regime. I infer that this was primarily the period during which these courier expenses were incurred which means the sum of $4,416 is recoverable. That makes the total sum of $5,352 recoverable for freight.
The testing costs of $96,680 relate to the period from August 1996 to March 1997. In view of my finding that the QHD testing regime was a direct consequence of the salmonella outbreak, the plaintiff should recover the costs of testing until that regime ceased in November 1996. The defendants submit that as Mr Hansen conceded that the testing of product did not reduce over time (after November 1996), no claim for additional testing should be allowed. The decision to continue testing after November 1996 to the same level required during the QHD testing regime was a commercial decision and does not alter the fact that the testing during the QHD regime was directly as a result of the salmonella outbreak. Approximately half the cost of the laboratory testing of $96,680 would cover the period from August to November 1996. The sum of $48,340 is therefore recoverable.
The health and safety protective clothing costs for the period to 31 March 1997 amounted to $17,307. That covered purchase of trousers and shirts with logos, safety boots, laundry costs, overalls, disposable boot, hair and beard covers, dust coats, liquid soap dispenser, towel dispenser, garbage bins and paint. Those items are consistent with purchases required to implement the change in hygiene requirements recognised as a result of the new awareness of salmonella contamination. Those costs are therefore not recoverable.
The amount spent by the plaintiff on accommodation and travel which remains in dispute is the sum of $15,531. Of this, the defendants now concede the sum of $1,184 which was expended on trips relating to the Kraft returns.
Most of the balance of $14,347 was spent on airfares. Mr Hansen stated that in September and October 1996 he went to Melbourne weekly to negotiate outstanding issues and price increases. Although some of those outstanding issues arose as a result of the new awareness of the risk of salmonella contamination, having regarding to the timing of the expenses while the QHD testing and clearance regime was in effect, I am satisfied that the expenses on this account have primarily been spent as a result of the salmonella outbreak. That makes the sum of $15,531 recoverable.
Of the balance of the claim for direct costs, I have therefore concluded that the sum of $89,967 is recoverable under Item 1(b) Basis of Settlement. The plaintiff also seeks to make this claim under Item 4 Basis of Settlement. The basis on which I have rejected part of this claim means that it would also not satisfy the requirement of being incurred “in consequence of the Damage” under Item 4.
Additional labour costs
The balance of the claim of $646,160 for additional labour costs remains to be determined, as foreshadowed by para [268] of the reasons. This claim was treated by Mr Rowley on the basis that additional labour costs were incurred by the plaintiff in consequence of the salmonella outbreak above what the plaintiff could be compensated for as loss of payroll under Item 3 Basis of Settlement. The plaintiff submits that the claim of $646,160 should be allowed in full, unless the defendants can show that the expenditure was not even partly the consequence of the salmonella outbreak. The parties are agreed that the amount in issue remains $646,160, even though the indemnity period has now been determined as ending on 31 March 1997. Alternatively, the plaintiff submits that the claim for additional labour costs is an indivisible loss and should not be apportioned. The defendants submit that the plaintiff has failed to prove what amount for labour costs of the sum of $646,160 resulted from the interruption of or interference with the plaintiff's business which was proximately caused by the salmonella outbreak and that no further allowance should be made. The defendant has an alternative submission based on the analysis set out in paras 46 to 64 of Exhibit 100 that an additional amount of $115,750 should be allowed for additional labour costs.
It is apparent from the description of the circumstances which required increased payroll after the salmonella outbreak that is set out in para [267] of the reasons that some, but not all, of those circumstances were related to the salmonella outbreak. In broad terms the plant changes were not a result of the salmonella outbreak, whereas the staff required for microbiological sampling and testing and some of the down time when no production occurred were the results of the salmonella outbreak. I do not accept that additional labour costs can be characterised as an indivisible loss when there are some causes for incurring labour costs which fall within the policy and others that do not. I am not satisfied that the new awareness of the risk of salmonella contamination had no impact on these additional labour costs above the impact of the salmonella outbreak.
There was no finding in the reasons that the plaintiff has established that additional labour costs of $646,160 were incurred until the end of 31 March 1997 as a result of the salmonella outbreak. I therefore reject the plaintiff's approach that it is for the defendants to show what expenditure was not the consequence of the salmonella outbreak.
Although the alternative submission of the defendant has been undertaken by reference to an analysis of documents and statements which are in evidence, it has also proceeded on the basis of assumptions and processes which the plaintiff has not had an opportunity to test. I therefore reject the defendant's alternative submission.
I consider it appropriate to endeavour to apportion the balance of additional labour costs of $646,160 on the basis of my finding that the majority of those costs were attributable to production changes that were the result of the new awareness of the risk of salmonella contamination and not the result of the salmonella outbreak. The same result follows, if the claim were considered under Item 4 Basis of Settlement. To the extent that some additional labour costs were due to an inefficiency in labour, they are recoverable as the payroll claim under Item 3 Basis of Settlement. I will therefore allow 20% of the additional labour costs as attributable to the salmonella outbreak. That results in a further amount of $129,232 being recoverable for additional labour costs under Item 1(b) Basis of Settlement.
Net increased sundry costs
This claim of $417,000 is dealt with in paras [272] to [275] of the reasons. The plaintiff still pursues the total sum of $417,000 and the defendants deny that any further amount is recoverable in respect of this item. My finding that the indemnity period ended on 31 March 1997 has not affected the quantum of this claim.
The claim for net increased sundry costs comprises:
Power and gas $106,000
Packaging 137,000
Stacking 50% 174,000
$417,000
The plaintiff submits that as it has shown that it has incurred these extra costs, it is for the defendants to show which part of those costs is attributable solely to the new awareness of the risk of salmonella contamination. I reject that submission. The plaintiff has not established a prima facie entitlement to the total sum of $417,000.
The plaintiff relies on para 9.24 of Mr Hansen's statement (Exhibit 4):
"QHD and Kraft required significant process changes to the way PCA had operated pre incident. As a result of these process changes and the start/stop operation of the plant caused by the interruption, batches were more fragmented than under the previous product flow, resulting in increased costs for power and gas, packing and stacking."
That is an acknowledgment that this claim for the increase in sundry costs was partly due to the process changes that were not a consequence of the salmonella outbreak.
The defendant asserts that no amount should be allowed on account of the increase in power and gas charges as that is attributable to the blanching and value added plant and was in consequence of the process changes. However, I accept Mr Hansen's evidence that part of the increased costs was as a result of the start/stop operation of the plant which can be directly attributed to the salmonella outbreak. As the process changes were obviously a much more significant cause of the increase in these charges, I will allow 25% of the amount claimed for increased costs for power and gas which results in a recoverable sum of $26,500.
To the extent that additional packaging costs was a result of reprocessing the Kraft returns, that has been covered in the claim for reprocessing costs. The other evidence about additional packaging was that it was caused by complying with the requirements of QHD. As that is not recoverable as a consequence of the salmonella outbreak, no amount should be allowed on account of increased packaging costs.
I made findings in para [274] of the reasons that some of the causes for incurring additional stacking costs related to the salmonella outbreak. The additional storage costs for the Kraft returns are included in the sum of $88,644 allowed for the Kraft returns in para [262] of the reasons. The claim for stacking costs of $174,000 was an imprecise claim at the outset, calculated by halving what the plaintiff calculated as total additional stacking costs. Having regard to the significance of the process changes which Mr Hansen attributed as one of the causes for the increased stacking costs, I consider it reasonable to allow 25% of the amount claimed as being due to the salmonella outbreak. That results in a recoverable sum of $43,500.
That means that the total amount which I have allowed for net increased sundry costs is $70,000. Because of the requirement in Item 4 Basis of Settlement that the costs be incurred “in consequence of the Damage”, no further amount for net increased sundry costs is recoverable under Item 4.
Temporary costs
I made the finding in para [276] of the reasons that each of the expenditures comprising the claim under Item 1(b) for temporary installation costs of $38,000 was for the sole purpose of avoiding a reduction in turnover. In para [277] of the reasons further submissions were therefore sought from the parties on whether each of these expenditures was as a result of the interruption to the plaintiff's business caused by the salmonella outbreak or could be primarily attributed to the plaintiff's need to address the new awareness of the risk of salmonella contamination.
The plaintiff submits that had these expenditures not been incurred, the defendants would have been faced with a far more significant claim in respect of turnover losses, as these expenditures allowed the plaintiff to reinstate production processes.
The defendants submit that although the amounts are now claimed as temporary, they were not incurred as temporary costs, but became temporary, when the plaintiff decided on further changes in the plant layout which resulted in the removal of the Kraft room.
In the circumstances of these expenses being incurred immediately following the salmonella outbreak to reinstate production in a crisis environment, notwithstanding that they also allowed the plaintiff to comply with QHD and Kraft requirements, they must be characterised as resulting from the salmonella outbreak. Whether or not the expenses were contemplated as being temporary when made, the removal of the Kraft room which was created as a result of those expenditures in October 1996 meant that the expenditures were for installation costs that were temporary. I therefore will allow the full amount of $38,000 for this item.
Claims preparation costs
In para [281] of the reasons, I deferred determining the claim under Item 2 Basis of Settlement for claims preparation costs, until the other outstanding claims were resolved. The actual costs incurred by the plaintiff for claims preparation is the sum of $208,000. When Mr Rowley was challenged in cross-examination that it was not reasonable for there to have been four progress claims followed by a final claim, he responded as follows:
“When you say ‘five efforts’, there were progress claims that were processed with the knowledge and expenses that were incurred to a particular time. We had a client who was experiencing cash flow problems. There had been a drying up of Kraft sales totally for a period. So that, understandably, as they had valid expenditure to recoup, they sought to recover those from the insurers."
I accept Mr Rowley’s evidence on the reasonableness of submitting five claims and the convenience and economy for the plaintiff to have employed Mr Neal to assist Mr Rowley’s firm in the labour intensive process of record retrieval and analysis relating to the preparation of the claims.
The reasonableness of the claims preparation costs must be affected to the extent that claims have been pursued that have been unsuccessful. In particular, the yield loss claim was complex requiring significant input from Mr Rowley and Mr Neal. Some deduction should therefore be made to these costs to reflect the lack of success of the plaintiff in significant items of the claim. I will allow $150,000 for claims preparation.
Loss of payroll due to reduction in turnover
This calculation was left open in para [282] of the reasons, pending the determination of the amount of the reduction in turnover allowable under Item 1(a) Basis of Settlement. In view of my finding made earlier in these reasons that the reduction in turnover attributable to the salmonella outbreak is $581,512, the loss of payroll due to reduction in turnover calculated under Item 3 Basis of Settlement is $79,609.
Additional costs of working
The expenditure being claimed under Item 4 Basis of Settlement up to 31 March 1997 has been agreed between the parties as $543,364. In para [288] of the reasons, I indicated that I could determine this claim by considering the description of each expenditure set out in appendix 15 to Mr Rowley’s statement, but I have allowed the parties to make further submissions in relation to this claim.
The defendants rely on the finding that I have made at para [181] of the reasons that it was the new awareness of the risk of salmonella contamination that underlies most, if not all, of the recommendations made by the QHD. The defendants therefore submit that the plaintiff is not entitled to recover any amount as additional costs of working due to the expenses incurred in complying with the recommendations made by the QHD.
The plaintiff submits that all of the expenditures claimed as additional costs of working were, at least in part, proximately caused by the outbreak and, even if there be another uninsured cause, that is sufficient for the plaintiff to recover. In addition the plaintiff relies on Re Mining Technologies Australia Pty Ltd and the evidence of Mr Wheeley to the effect that spending $10,000 to comply with a requirement of the QHD in order to avoid $100,000 in loss of turnover is the sort of expenditure that can be recovered under Item 4 Basis of Settlement. As an alternative submission, if I were not prepared to allow the entirety of this claim, the plaintiff submits that a determination be made as to whether each expenditure is attributable exclusively to new awareness of the risk of salmonella contamination on the basis that any amount which is proximately caused by the new awareness of the risk of salmonella contamination and the salmonella outbreak ought to be allowed.
I made findings in the reasons which discriminated between the causes affecting the conduct of the plaintiff’s business after the salmonella contamination in Lot B0520. I concluded at para [185] that I should look at the consequences of the salmonella outbreak in June 1996 for the plaintiff’s business, if possible, as distinct from the consequences for the plaintiff’s business arising from the new awareness of the risk of salmonella contamination. I then concluded at para [188] of the reasons that, in the light of the evidence of Dr Wood and the reports of Mr Miller, the recommendations of the QHD and the Kraft requirements and the consequences that flow from them should not be treated simply as a response to the salmonella outbreak in June 1996.
Notwithstanding that the timing of the QHD requirements was due to the salmonella outbreak, as I have already found, it was that new awareness of the risk of salmonella contamination that underlies most, if not all, of the recommendations made by the QHD. It follows that the plaintiff cannot be successful in recovering the amount of $600,000 claimed as additional costs of working under Item 4 Basis of Settlement, as those costs were not incurred “in consequence of the Damage”.
I have rejected the argument of the plaintiff based on an implied term, relying on Re Mining Technologies Australia Pty Ltd. The concession which the plaintiff obtained from Mr Wheeley in relation to expenditure that can be recovered under Item 4 Basis of Settlement was made in isolation from the requirement under that Basis of Settlement that the expenditure be “in consequence of the Damage”. In the light of the conclusion which I had already reached about the cause of the recommendations made by the QHD, it is unnecessary for me to deal with each expenditure in this claim separately.
Credit for Kraft price increases
When submissions were made at the end of the trial, the plaintiff was willing to grant a credit to the defendants by way of a deduction from the claim on the basis that the plaintiff’s case was that the price increases were negotiated by the plaintiff with Kraft in response to the increased costs being incurred by the plaintiff as a result of the process and plant changes. As I have found in the reasons that those process and plant changes arose from the new awareness of the risk of salmonella contamination rather than the salmonella outbreak, it is not appropriate for the defendants to be given a credit for the Kraft price increases.
Interest carrying costs
The issue of interest carrying costs was left open in para [271] of the reasons. As the amount payable under this item is dependent upon the outcome of the litigation, the plaintiff submits (and the defendants do not dispute) that it is appropriate for further submissions in relation to interest carrying costs to be heard following publication of these reasons. That is an appropriate course.
The plaintiff also asks for a finding to be made for the purpose of s 57 of the Insurance Contracts Act 1984 (Cth) as to the date by which it was unreasonable for the defendants to refuse payment of the plaintiff’s claim. The plaintiff submits that that date was no later than, say, 31 October 1997 which was 6 weeks after the defendants received the final claim submission.
It is necessary to consider the complexity of the final claim submission, the development of the claims between the progress claims and the final claim submission and that negotiations thereafter continued between the parties in respect of the final claim. In those circumstances, I consider that it was unreasonable for the defendants to have withheld payment of the further amount which my findings show is the balance due by the defendants to the plaintiff from approximately 3 months after the final claim submission. I find that interest is payable under s 57 of the Insurance Contracts Act 1984 (Cth) from and including 1 January 1998.
Conclusion
My findings in relation to the plaintiff’s claims under the policy can be summarised as follows:
Description Amount Loss of gross profit $84,145 Direct costs 376,881 Yield losses - Additional labour costs 262,072 Reprocessing costs 118,000 Net increased sundry costs 70,000 Temporary installation costs 38,000 Early payment discounts 20,000 Claims preparation costs 150,000 Payroll 79,609 Additional costs of working - Total $1,198,707
To the total figure of $1,198,707 will need to be added the interest carrying costs, but credit will need to be given for the progress payments of $700,000 received by the plaintiff from the defendants.
In order to facilitate the receipt of submissions from the parties on the matters which remain outstanding, as a result of the publication of these reasons, I propose making the following orders:
1.The plaintiff must on or before 24 August 2001 deliver to the defendants and the Associate to Her Honour Justice Mullins written submissions on the issues of interest carrying costs, interest under s 57 of the Insurance Contracts Act 1984 (Cth), costs of the proceeding, the form of orders and any other outstanding matters.
2.The defendants must on or before 31 August 2001 deliver to the plaintiff and the Associate to Her Honour Justice Mullins written submissions in response to the plaintiff’s submissions under the preceding order.
3.The plaintiff must on or before 7 September 2001 deliver to the defendants and the Associate to Her Honour Justice Mullins any written submissions in response to the defendants’ submissions under the preceding order.
4.Either party may on or before 11 September 2001 notify the other party and the Associate to Her Honour Justice Mullins if an oral hearing is required in relation to the matters the subject of the written submissions, but in the absence of any such notification the outstanding matters will be determined by reference to the written submissions of the parties.
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